Internal Revenue Service
Revenue Ruling
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smRev. Rul. 54-84
1954-1 C.B. 284
Sec. 7701
Full Text
Rev. Rul. 54-84
In 1952 A, a person with capital, B, a lawyer, C, a lease superintendent, and D, a drilling superintendent, entered into an agreement to acquire, explore, and develop oil and gas properties. By the terms of the agreement, B, C, and D were authorized to acquire oil and gas leases, to make contracts and commitments for the drilling of wells for oil and gas, and otherwise to develop the property; they assumed responsibility for the operation and management of the properties acquired. A agreed to furnish all tools, to finance the project, and to bear any losses, but he reserved the right to refuse at any time to contribute further money. It was agreed that A should first be reimbursed out of the income from the property for all cost and expenses, and that thereafter the profits should be divided one-half to A and one-sixth each to B, C, and D. B, C, and D received no compensation except their share of the profits. The arrangement by its terms did not provide the continuity of life and centralization of management characteristic of a corporation. Operations were very successful, and subsequently the parties sold certain of their producing leases held for more than 6 months to an outside purchaser. The leases had been taken in A's name and A had not formally transferred title therein to B, C, and D prior to the sale, but the contract of sale recited that B, C, and D, as well as A, were owners of interests in the leases.
Held, the arrangement between A, B, C, and D constitute a joint venture or partnership for Federal income tax purposes; B, C, and D were joint venturers with A in the acquisition, exploration, and development of oil and gas properties, rather than agents or employees of A in searching for and leasing such properties. Cf. W. L. Walls v. Commissioner , 60 F.(2d) 347, and W. B. Massey et al. v. Commissioner , 143 F.(2d) 429. The leases held for the group in A's name constituted partnership assets, it being immaterial for that purpose that title was held in A's name only. To the extent that such leases constitute `property used in the trade or business' within the meaning of section 117(j) of the Internal Revenue Code, gains or losses resulting from the sale thereof are subject to the provisions of that section.